As a concept, Bitcoin options trading can be relatively difficult to grasp, particularly for new traders due to the technical vocabulary that is often used to describe it. Because of this, if you intended to get involved in options trading, or just want to brush up on your investment jargon, then these are the key terms you will want to understand.
Call
If you are bullish on the price of Bitcoin, then you would consider opening a call option, as this will allow you to buy BTC at the strike price, even if the market value is higher. In essence, Bitcoin call options allow you to speculate on the future growth of Bitcoin.
For example, if you buy a call option with a strike price of $10,000 and a 6-month expiration date, you will then be able to buy BTC at $10,000 in 6 months, even if the market value is much higher. You could then go on to sell this 1 BTC at a profit.
Put
If you are looking to short Bitcoin, and believe that its price will go down over the option contract term, then you would want to open a put contract. This will essentially allow you to sell Bitcoin at the strike price, even if the market value is much lower.
In essence, put options allow you to speculate on the decline in an asset’s value. After buying a put option, the more BTC goes down before expiry, the more your option is worth.
For example, if you buy a put option with a strike price of $5,000 and Bitcoin trades below this price at maturity, you will be in the money and will make a profit on the difference in value between the spot price and strike price.
Strike Price
One of the most important terms to consider when purchasing a Bitcoin option is its strike price. In short, the strike price is the price a Bitcoin option holder can buy (call option), or sell (put option) an underlying asset when the option is exercised.
For example, if you have a Bitcoin call option that is “in the money”, then you be able to buy the agreed amount of BTC at the strike price. Conversely, if your Bitcoin put option is “in the money”, you will be able to sell the agreed amount of BTC at the strike price.
Maturity
An option’s maturity date is also known as its expiration date. This is the last date by which the option must be exercised before automatically expiring. After the maturity date, the seller will no longer have any obligation to the buyer, and the buyer will be unable to exercise his or her option.
Typically options will have a fixed expiration date, this might be 1 day, 1 week or any length of time. If your option is out of the money when expiring, you will lose the amount you paid for the option.
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What Is Bitcoin/Crypto Options Trading?
Options trading is not a new concept, but I believe some of you might not be aware of its benefits.
So allow me to help you out.
Optionsare financial instruments that derive their value from other underlying asset prices. These assets can be stocks, bonds, indexes, or cryptocurrencies.
As the name suggests, options trading gives an option or choice to the trader to buy or sell an asset in the future at a pre-agreed fixed price irrespective of whatever the asset price is at the time expiry.
Complicated? Let me explain with an example.
Let’s say you have a healthy-looking Bitcoin portfolio, and you are satisfied with it. But you are also aware of the volatility of the BTC market and are expecting a bear market.
You are skeptical of this impending bear market and are unsure whether your healthy-looking portfolio will continue to look healthy.
In this case, you would want to minimize the risk of your portfolio and would not want to lose the unrealized profits, especially if the bear market never ends.
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Enter Bitcoin options for it.
You can purchasePut Optionsfor Bitcoin. Put options are the financial instruments that will kind of lock the selling price for your bitcoins in the future. Having put options in such a case is like having portfolio insurance in a declining market situation.
Put options can be bought easily through a Bitcoin options exchange where you need to pay a small premium or fee to purchase such put options.
Now, let’s say you have 10 BTC, which you bought each worth $10,000, and the current market price is $12,000. You are expecting the price per BTC to hit $8,000 in the future. So, you have purchased 10 Bitcoin put options for $50 each at a strike price of $10,000 per BTC.
After some time, your skepticism comes true, and the BTC price enters into the bearish zone and is lingering around $8000 (strike price), and you want to exit your position.
So, in this case, you can exercise your put options and still sell Bitcoin for $10,000 per BTC.
In this scenario, you realized all the profits from your BTC portfolio regardless of the market BTC price. Thanks to BTC, put options for it.
Also, notice you were able to exercise these put options because you had already paid a premium of $500, i.e., $50 per put option, which I think is a cool deal to hedge against your portfolio risk.
If not having a put option, you would have lost 20,000, i.e., $2000 per BTC, because Bitcoin was later trading at the $8000 mark.
So that way, you enjoy the insurance with Bitcoin put options.
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But remember, Bitcoin options holders are not obligated to do this in case the price of BTC shoots up in the future. That’s why it is called an option.
Still, for the seller of a put option, it is an obligation now to buy the underlying asset, i.e., BTC, if the buyer decides to exercise his/her put option in a scenario of a Bitcoin price downturn.
Some More Basics About Bitcoin Options
In general, there are two types of options, known as Puts & Calls.
Traders, hedgers, etc., use the call option (right to buy) or Put option (right to sell). These are also called options contracts and consists of broadly four essential components:
- Size:It means the size or the number of options contracts anyone needs to buy, either calls or puts. Sometimes also referred to as the lot size.
- Expiry Date:The date before which one can exercise the option. After this day, the options expire, and the holder no longer enjoys the right to exercise the contract.
- Strike Price:The price at which the asset will be bought or sold if the asset’s actual price in the market hits it.
- Premiums:It is like a fee or the cost investors pay to buy different kinds of options. The premium is affected by the underlying asset’s volatility and intrinsic value.
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When you pay a premium for a call option, it means you are paying to exercise the right to buy under the expiration date. On the other hand, when you pay for put options, it means you are purchasing the right to sell an asset once the Bitcoin option expires.
So using Bitcoin options, Bitcoin owners usually do these two types of trades:
- Protective Put:It is buying put options for the bitcoins you already own. Buying this ensures your BTC portfolio is against the potential downturn. If the downturn doesn’t happen, you only lose the option premium you paid to purchase these puts.
- Covered Call:In this case, too, you own the BTC and are sure of the price movements in the future. Using this situation, you can make extra income from your holdings.
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So when the call option you are selling expires and the strike price is not reached, you would have earned extra through the premium of the call option you sold.
On the other hand, if the strike price is reached and the buyer of the call option would want to exercise the contract, and as a seller, you would be obligated to sell your bitcoins.
